Fiscal data point to broader funding gap

China’s fresh fiscal data indicated a broader funding gap faced by the government, driving the authorities to explore new channels and maintain a balanced budget, said analysts.

The Chinese government’s fiscal deficit, the gap between the government’s spending and income, expanded to 579 billion yuan ($86.19 billion) in the first two months, the largest since 2010 compared with the same period each year, showed data from the Ministry of Finance.

A “tax-cut” themed annual Government Work Report, released on March 5, has attracted more economists to track China’s fiscal data, as it becomes increasingly important for indicating growth momentum and mirroring the macroeconomic policy stance.

In the January-to-February period, China’s fiscal revenue growth accelerated to 7 percent year-on-year, compared with 1.9 percent in December, the ministry reported on the evening of March 18.

Individual income tax revenue fell by 18.1 percent in the first two months, compared with growth of 1.7 percent in December, because the new individual income tax deduction policy took effect in January.

“The features of fiscal data in the first two months will influence the whole-year trend,” said Zhang Yu, an analyst with Hua Chuang Securities.

Despite the short-term unexpected fast expansion, fiscal revenue growth might have remarkably slowed to 2.2 percent in the period of October 2018 to February, compared with 10.6 percent in the first half of 2018, according to Nomura Securities.

The government’s income from land sales dropped sharply in the meantime. Given this year’s target of cutting about 2 trillion yuan of tax and fees, the fiscal pressure may rise in the coming months, said analysts.

At the conclusion of the annual two sessions on March 15, Premier Li Keqiang announced at a news conference the reduction of VAT rates from April and a lower social insurance premium from May.

Policymakers may have to allow local governments “more flexibility” on funding via local government financing vehicles and public-private partnership (PPP) programs, “to ensure overall government spending is a growth driver instead of a drag”, said Lu Ting, Nomura Securities’ chief economist in China.

The finance ministry issued a new guideline to support PPP investments on March 7. It clarified the boundary between “healthy” projects and the toxic ones that may increase local governments’ hidden debt.

An official from the ministry said that so far, about half of the local governments have contributed more than 5 percent of the PPP projects’ investment, which needs to be monitored. Following the new rule, if the local government spends higher than 5 percent of the projects’ total capital, new PPP projects will not get registration approval.

The regulation aims to curb the growth of local government’s contingent liabilities, said the ministry. Beyond that, the new policy will encourage PPP financing in proper ways.

Foreign capital and insurance companies are encouraged to join the PPP investment, especially for infrastructure projects, and public welfare programs including healthcare and education, according to the finance ministry.

The ministry also showed that, in January 93 new projects registered on the national PPP database, including projects of municipal engineering, transportation and environment protection.